Vehicles imported after seven years from the manufacture date are subject to a 400pc excise tax. The tariff is 60pc for new vehicles, while electric vehicles are exempted from duty.

Officials of the Ministry of Finance have suspended the auctioning off of used vehicles under the custody of the Adama Customs Branch Office, giving a sigh of relief to the importers.

Over 630 vehicles were brought into the country but apprehended by tax authorities for allegedly evading paying duties. Eighty-three of them were put up for auction by the Office. The saga began in the wake of an adjustment to excise tax rates two years ago.

Excise tax – often described as "sin tax" – is imposed mainly on luxury items imported but affects health, such as alcohol and tobacco. In January 2020, the government set a hefty excise tax rate on used vehicles to discourage the import and sale of used cars. Vehicles aged between two to four years are subjected to the lower tariff rate of 105pc. Those who bring in cars over seven years since manufacturing and with an engine capacity of 1,300cc pay over 400pc of the car's value. New and fully-assembled vehicles are subject to a 60pc excise tax, while electric vehicles are exempted from duty.

A six-month grace period was granted to importers bringing vehicles when the revised tariffs were introduced.

The COVID-19 pandemic broke a month after the directive was introduced, leading to major ports' closure and supply chains disruption. Asrat Demelaw, secretary of the Vehicles Importers Association, says the closure of ports left importers unable to bring vehicles and fulfil customs requirements on time when the grace period ended in August 2020. The vehicles, shipped from the United Arab Emirates, South Korea and Europe, have been used for two to seven years. The lobby group says the complications led to 637 used cars being stranded in various locations, from ports in Djibouti to Modjo Dry Port and the Adama Customs Branch Office.

The auction was called off after leaders of the 1,000-strong Association held discussions with Eyob Tekalign (PhD), a state minister for Finance.

There are close to 4,000 vehicle importers in the country.

Half the vehicles had received offers when the Adama Customs Branch Office floated the auction last month. The highest offer made was 2.2 million Br, according to Mengistu Gelcha, Adama Customs Branch Office manager. However, the Office put the brakes on the auction process after the auctions began by order of the Finance Ministry. The Office has 155 vehicles under its custody, while dozens more are stranded at the Modjo and Gelan dry ports, the Addis Abeba Qality Customs Branch Office, and ports in Djibouti.

This is not the first time the Adama Customs Branch Office has tried to auction off the vehicles. In November 2020, it had floated an auction to sell half of the vehicles under its custody. However, a court order blocked the move, leading the Office and the importers spent the following year in litigation. Last October, the Lideta First Instance Court ruled in the Office's favour.

“The Office has been preparing to auction the vehicles since the ruling," said Wendwosen Abiyu, coordinator of seized property administration at the Office.

Tax officials cite a two-year-old law to justify their claims. The directive issued by the Finance Ministry in 2020 gives the Customs Commission the power to confiscate imported items without paying the necessary duties. Unlike other laws, tax laws are interpreted narrowly, according to Yehualashet Tamiru, a legal consultant and researcher. They are drafted in a largely pro-state manner.

The expert observed that the importers must fulfil two criteria to trigger force majeure provisions, which might be their only way out.

"Although COVID-19 is not 'force majeure' on its own, its consequence can be seen as so," said Yehualashet.

They can also prove that the events had made carrying out imports materially impossible. Here, the effects of the pandemic, such as the lockdowns, are evaluated.

"Although the importers' case fulfils the first criterion, it is doubtful when it comes to the second," said Yehualashet.

The observations are troublesome for Abraham Lemma, a major shareholder of Geneve Car Import Plc. In business for the past 12 years, the company imported 60 of the vehicles seized by customs authorities. It bought the cars from Dubai for 20 million Br.

However, half of the vehicles were put on sale in the first auction held by the Adama Customs Branch Office in November 2020. Abraham struggled to cope with changes in the car import business since the excise tax rates were revised.

Vehicle imports, mainly used cars, have dropped significantly since. On average, 4,500 used vehicles would be brought in each month before the revised tax rate. It has since fallen to 3,100. Close to 85pc of imported vehicles are second-hand, and about 90pc are Toyota models, revealed a study by Deloitte Africa Automotive Insights. These vehicles are imported mainly from the United Arab Emirates.

Industry players saw fewer used vehicles, including Toyota models such as Vitz, Yaris, Platz, and Corolla, were imported over the past two years. Instead, brand-new Toyota and Suzuki models are growing more common.

Abraham is worried about himself and the 30 employees employed by the company.

“My money is still tied up, limiting us from importing new vehicles and surviving," he told Fortune.

Officials seem determined to collect every penny they believe the state is owed. Mengistu, the customs manager, say that besides paying excise taxes based on the revised tariff rates, the importers would be required to pay demurrage fees. Around half of the vehicles are stranded at ports in Djibouti.

“We'll continue pursuing every option to make importers pay the taxes or confiscate the properties,” said Mengistu.

PUBLISHED ON Apr 22,2022 [ VOL 23 , NO 1147]

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